economics essay

EXPLAIN THE MIXED ECONOMY APPROACH TO THE ALLOCATION OF RESOURCES

Published: 23, March 2015

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An economic system is the system of production, distribution and consumption of goodsÂ and services of an economy [CITATION Abo101 \l 2057] . The factors of production (Land, Labour, Capital and Entrepreneurship) needed for any economic system to function are scarce [CITATION Abo101 \l 2057] and as a result the resources must be allocated efficiently and effectively to get the optimum benefit.

The mixed economy is a combination of two economic approaches, the free economy and the planned economy. Before discussing the mixed economy, the other two approached will be briefly covered as follows:

FREE ECONOMY

Goods and services are allocated by market price in a free economy, a Laissez-faire economy, without any intervention from the government. Those who are willing and able to pay the market price for various goods and services get those goods and services [CITATION Abo101 \l 2057] . This is at the summit of capitalism. Free economy, in reality is a myth, only exists in the wild where humans do not intervene and where it is the case of survival of the fittest [CITATION Abo101 \l 2057] .

AdamÂ Smith, aÂ ScottishÂ moral philosopherÂ and a pioneer of political economics, was of the opinion that if everybody acts from self-interest, spurred on by theÂ profitÂ motive, then the economy will work more efficiently, and more productively, than it would do were economic activity directed instead by some sort of central planner [CITATION Abo101 \l 2057] .

However, the free market creates self-interest in society which relegates the less fortunate to poverty as capital flows to where it will get the highest return, creating a growing gap between the rich and the poor. With this in mind, Adam Smith recognised that someÂ governmentÂ action might be needed, such as to impose antitrust laws, enforce property, and to provide policing and national defence [CITATION Abo101 \l 2057] .

PLANNED ECONOMY

In a planned economy, resource allocation is determined by a central authority (usually the government) rather than by demand and supply. This is normally practised by socialist countries. The central authority determines the quantity of goods and services produced in the economy. It tries to allocate resource fairly in society, ensuring there is not a great divide between the rich and poor.

A planned economy, in theory, does not suffer fromÂ business cycles, asset bubbles and it does not experience crises ofÂ overproduction [CITATION Abo101 \l 2057] .

However, a planned economy lacks the kind of flexibility that is present in a free economy, and because of this, it reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. This is so as the government is reliant on taxes and inefficiently responds to the price signals imposed by the market.

The performance of nationalised firms has often been poor compared with their private-sector counterparts. State-owned businesses often enjoy a legally protectedÂ monopoly, and the lack of competitionÂ means the firms face little pressure to be efficient.

Politicians often interfere in important management decisions, making it harder to take unpopular actions on pay, factory closures and job cuts, particularly when there are strong public-sector tradeÂ unionsÂ and a union-friendly government.

Royal Mail is a good example of how the government impeded it from taking on sensible business strategies and modernising its operations. It was a legally protected monopoly till 2006 following the liberalisation of the postal market which opened the door to newer and more efficient competitors, leading to fall in revenue.

Politically imposed financial constraints may also force public-sector firms to under invest. Although privatisation has not been universally beneficial, on balance it has increased economicÂ efficiency.

MIXED ECONOMY

The mixed economy has an element of both the free economy and the planned economy. It reflects the fact that both market and government participation is required in the allocation of resources, as both systems have disadvantages which are corrected by the other. It includes both capitalist and socialistÂ economicÂ policiesÂ and often arises in societies that seek to balance a wide range of political and economic views [CITATION Abo101 \l 2057] . The mixed economic system is used in most countries, but the extent of the influence of the market or government varies from country to country.

The UK for example is a mixed economy with a majority of decisions made by the market due to the high level of efficiency in responding to the needs of consumers and some by the government. In a mixed economy, individuals can help guide theÂ economyÂ not only through the choices they make as consumers but through the votes they cast for officials who shape economic policy.Â

John Maynard Keynes thought it would be beneficial for the government to use fiscal and monetary measures to mitigate the negative impact of economic recessions, depressions and booms [CITATION Abo101 \l 2057] . Keynesian economics argues thatÂ private sectorÂ decisions sometimes lead toÂ inefficient macroeconomic outcomes and therefore advocates active policy responses by theÂ public sector, includingÂ monetary policyÂ actions by theÂ central bankÂ andÂ fiscal policyÂ actions by the government to stabilize output over theÂ business cycle. The events of the recessionÂ in 2007 has seen aÂ resurgence in Keynesian thought. World leaders have used Keynesian economics to justifyÂ government stimulusÂ programs for their economies [CITATION Abo101 \l 2057] .

During the last two decades of the 20th century, many governments committed to theÂ free market pursued policies ofÂ liberalisationÂ based on substantial amounts of deregulation hand-in hand with theÂ privatisationÂ of industries owned by the state. The aim was to decrease the role of government in the economy and to increase competition. Even so, red tape is alive and well. In the United States, with some 60 federal agencies issuing more than 1,800 rules a year, in 1998 the Code of Federal regulations was more than 130,000 pages thick. However, not allÂ regulationÂ is necessarily bad. According to estimates by the American Office of Management and Budget, the annual cost of these rules was $289 billion, but the annual benefits were $298 billion [CITATION Wik103 \l 2057] .

Q2. WHAT FACTORS DETERMINE THE EXTENT TO WHICH AN ECONOMY IS MIXED? (15MARKS)

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